Pacific Investment Management Co.'s flagship Total Return fund
is headed for its biggest quarterly loss in two years, hurt by a
broad selloff in high-grade debt markets in the U.S. and
Europe.
The $107.3 billion fund has posted a negative total return of
1.97% this quarter through Thursday, according to data from fund
tracker Morningstar Inc. that accounts for price moves and interest
payments. It was the fund's biggest three-month loss since the
second quarter of 2013 when the bond market was rattled by the
so-called taper tantrum, or fears over reduced bond buying from the
Federal Reserve.
The Pimco fund's loss mirrors the negative impact on bond funds
as the tide has shifted into higher bond yields this quarter.
Investors have shed bondholdings, sending prices of U.S. Treasury
debt and German government bonds lower following a recent strong
run-up.
On average, the intermediate-term bond fund category where the
Pimco fund belongs posted a loss of 0.127% this quarter through
Thursday, according to Morningstar. The Barclays U.S. Aggregate
Bond Index, a key measure of U.S. fixed-income markets, posted a
loss of 1.956% this quarter through Thursday after a 1.607% gain in
the first quarter. The index is the Pimco fund's benchmark.
The setback comes at a time when the fund has been struggling to
stem cash withdrawals from clients over the past year following a
major leadership shake-up. Bill Gross, co-founder of Pimco and
longtime manager of the fund, abruptly quit in late September. In
April, Total Return ceded its title of world's largest bond fund to
an index fund run by rival Vanguard Group.
"Poor performance rarely turns outflows around," said Jeff
Tjornehoj, head of Americas Research at Lipper. But he noted that
since Mr. Gross's departure, the new managers have guided the fund
to a 1.53% return, which puts them in the top-third of their peer
group as measured by Lipper's metrics.
"There's room for improvement, but top-third is a good place to
be when you've faced months of investor revolt," he said.
Changes at Pimco in recent years have set off anxiety, but its
level has diminished "dramatically" as the firm has addressed
organizational concerns and its ability to perform, said Pimco
Chief Executive Douglas Hodge at Morningstar's annual investment
conference in Chicago.
Investors pulled about $3 billion out of the Pimco fund in May,
the smallest monthly outflow since Mr. Gross's departure. During
the first full month after Mr. Gross's departure, investors pulled
$27.5 billion from the fund, setting a mutual-fund-industry record
for the largest monthly outflow ever.
The Total Return fund now has a three-person management team of
Scott Mather, Mark Kiesel and Mihir Worah and is overseen by group
Chief Investment Officer Daniel Ivascyn. In the latest monthly
commentary on the fund's performance and allocation, its managers
said the rise in bond yields have hurt their holdings of core
eurozone government debt.
Furthermore, the fund managers said the market has moved against
their bets in the Treasury debt market. The fund has bet on a
flattening yield curve, basically meaning they bought longer-dated
bonds and sold shorter-dated notes betting on a shrinking yield
premium to hold longer-dated debt.
But the selloff this quarter has concentrated on longer-dated
bonds amid growing valuation concerns after a recent strong run-up
in prices. Adding to the punch, the Federal Reserve continued to
suggest a cautious stance on raising short-term interest rates,
making shorter-dated notes less vulnerable to a selloff.
Despite the setback, the fund still gained 0.202% this year
through Thursday, compared with a loss of 0.38% on the benchmark
index and beating 77% of its rivals, according to Morningstar.
The fund has maintained a solid long-term track record. It has
delivered a return of 6.6% on an annualized base on average over
the past 15 years through Thursday, beating 5.46% on the benchmark
and outpacing 96% of its peers.
Pimco is "in no way" turning its back on the Total Return Fund,
which remains its flagship strategy and will be back in vogue with
investors at some point, Mr. Ivascyn said Friday at the Morningstar
event. The firm doesn't want to concede the core fixed-income area
to anyone, he added.
Daisy Maxey contributed to this article.
Write to Min Zeng at min.zeng@wsj.com
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